BofA Sees More Short-Term Weakening For Treasuries, Munis

By Michael Aneiro

Bank of America Merrill Lynch says it sees further short-term weakness ahead for munis and Treasuries alike, after both saw roaring rallies in January but have pulled back a bit this month. Here’s BofA on Treasuries:

We have expressed our opinion that the Treasury bull market should last for several months, but in the short term, 2.5680% reached by the 10Y Treasury on Monday [last week] should be a good stalling point. This level is at the very extreme end of our suggested range of 2.57%-2.62% published previously. For the time being, we believe we are in the middle of a selloff which should last for more than two weeks, with the 10Y Treasury yield targeting the 2.80%-2.85% area before a multi-month bull market can resume again sometime in the future.

BofA said the relatively weak January employment report released Friday “simply confirmed the fact that the underlying US economy is not reaching escaping velocity as previously believed.” More from BofA on the muni side of things:

As we wrote last week, the muni rally stalled even earlier, i.e., on 24 January 2014. Since then, a moderate selloff has been the theme, with the 10Y AAA yield rising approximately 10bp and 30Y 7bp so far. Trading volume has been lighter than normal. This theme should continue for the next few weeks as long as Treasuries remain in the sell mode. Based on various technical analysis and our view on Treasury market, we think that another 10bp rise in the 10-30 year part of the AAA muni curve is quite likely. If yields rise by 10bps, we would become bullish on the muni market, regardless of where the Treasury market is by then. In the interim, we think investors should stay in shorter maturities in the near future and wait for better opportunities to arise.

I’ve written repeatedly in recent weeks in this blog and my Current Yield column that munis typically sail through January before hitting choppy waters in February, based on seasonal factors that recur fairly reliably each calendar year.